By Chris Ebert
Should Technical Traders Watch The News?
For many years it has been no secret to readers here that it is possible to make a case that when viewing stock prices from a technical standpoint, the chart creates the news and not t’other way around.
Given the ease of access to financial data these days, not only through traditional sources such as print, radio and television; but also in real time on computers and mobile devices, a trader can be bombarded with news from all angles. That raises a new question for technical traders – those who base trades purely on the charts of stocks.
“Should a purely technical trader make efforts to avoid seeing financial news?”
Certainly one of the most famous traders in history, Nicolas Darvas, made a point of stressing how he made millions in the stock market as a purely technical trader but almost lost it all when he exposed himself to the news. He revealed the details in his classic 1960 book How I Made 2,000,000 in the Stock Market.
In modern times, Steve Burns, another very successful trader proved that the Darvas technique is still valid today. His methods are detailed in his 2010 book How I Made Money in the Stock Market.
In each book it becomes apparent that it is possible to profit in the stock market using a purely technical approach, using only the chart to make decisions regarding trades. The news itself becomes almost irrelevant, because if the news affects the chart the trader ends up indirectly making a trade because of the change in the chart, not directly because the news itself.
The purely technical trader chooses buy and sell points ahead of time based on a time-tested system that has produced an expectancy of overall positive profits in the past. Another successful modern-day trader, Richard Weissman, clearly explained the importance that positive expectancy has to all traders, whether technical or fundamental, in his popular 2011 book Trade Like a Casino.
If positive expectancy is the ultimate goal of a trader – and it should be – then it stands to reason that anything that stands in the way of positive expectancy should be avoided. Ironically, the same news that is designed to keep traders informed about market developments may act as one of those obstacles.
Unless a positive-expectancy model is specifically tailored to include news events (for example, many traders have found positive expectancy by not holding stock positions through corporate earnings reports) then the news should have no bearing on a technically based trade.
Try as they might, most traders will at some point find difficulty ignoring financial news, particularly because modern technology has made it so pervasive. Not only is it in the daily newspaper, on radio and television broadcasts, but now also worked its way into news feeds on Twitter, Facebook and other social media. It is almost impossible to avoid the news completely without going entirely off the grid.
The wisdom of some great traders such as Darvas, Burns and Weissman tells us that a technical trader should focus on the technical aspects of trading – the charts. If seeing or hearing the news interferes with that focus, it seems it would behoove the technical trader to avoid such news as much as possible.
Likely there are some veteran technical traders who can put on a purely technical trade and still watch financial news without being distracted from the trade, knowing full well that their positive-expectancy model is robust and back-tested sufficiently to ensure it will endure in the long run. For them, watching the news merely bolsters the theory that much of the time the chart creates the news and not t’other way around. News certainly has its place, particularly for fundamental-type traders. It may even be valuable for technical traders who are able to use it in context (for example to evaluate the trading environment, as when stock prices rise after bad news has been released). But for technical traders who are not prepared, it can lead to disaster!
Currently, an options analysis of the S&P 500 indicates it has hit “Resistance”. Thus, any positive headlines that lead to a rally are likely to run into a brick wall. A technical trader does not need to be concerned with the headlines themselves, but rather the main concern should be a break in that brick wall.
If the wall breaks, stocks will break out of their current funk. The technical trader will then jump on the coattails of such a rally, whether or not the news catalyst that initiated the rally is known to him.
A technical trader who spends his days pouring through financial news could drive himself crazy trying to predict the next catalyst that might cause a breakout (Fed Minutes, oil prices, political unrest, war, natural disaster, corporate earnings, new product releases, etc.), or he can relax in relative silence and wait for the chart to show him.
Click here to read why The Chart Creates the News and not T’other Way Around
The preceding is a post by Christopher Ebert, author of the popular option trading book “Show Me Your Options!” Chris uses his engineering background to mix and match options as a means of preserving portfolio wealth while outpacing inflation. Questions about constructing a specific option trade, or option trading in general, may be entered in the comment section below, or emailed to OptionScientist@zentrader.ca